Deck 9: Long-Term Liabilities

Question 1

Serial bonds are:

A) bonds backed by collateral.
B) bonds that mature in installments.
C) bonds with greater risk.
D) bonds issued below the face amount.

Answer 1

B

Question 2

Which of the following is not a primary source of corporate debt financing?

A) Bonds Payable.
B) Common Stock.
C) Leases.
D) Notes Payable.

Answer 2

B

Question 3

Samson Enterprises issued a ten-year, $20 million bond with a 10% interest rate for $19,500,000. The entry to record the bond issuance would have what effect on the financial statements?

A) Increase assets.
B) Increase liabilities.
C) Increase stockholders' equity.
D) a. and b.

Answer 3

D

Question 4

A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current market rate of interest is 6%. These bonds will sell at a price that is:

A) Equal to $500,000.
B) More than $500,000.
C) Less than $500,000.
D) The answer cannot be determined from the information provided.

Question 5

The mixture of liabilities and stockholders' equity a business uses is called its:

A) Bond contract.
B) Indenture agreement.
C) Capital structure.
D) Accounting equation.

Question 6

The advantages of obtaining long-term funds by issuing bonds, rather than issuing additional common stock, include which of the following?

A) Funds are obtained without surrendering ownership control.
B) Interest expense is tax-deductible.
C) The company's default risk decreases.
D) a. and b.

Question 7

Which of the following definitions describes a secured bond?

A) Matures on a single date.
B) Secured only by the "full faith and credit" of the issuing corporation.
C) Matures in installments.
D) Supported by specific assets pledged as collateral by the issuer.

Question 8

A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current market rate of interest is 8%. These bonds will sell at a price that is:

A) Equal to $500,000.
B) More than $500,000.
C) Less than $500,000.
D) The answer cannot be determined from the information provided.

Question 9

Which of the following is not true regarding callable bonds?

A) This feature allows the borrower to repay the bonds before their scheduled maturity date.
B) This feature helps protect the borrower against future decreases in interest rates.
C) Callable bonds benefit the bond investor.
D) A bond can be both callable and convertible.

Question 10

The price of a bond is equal to:

A) the future value of the face amount only.
B) the present value of the interest only.
C) the present value of the face amount plus the present value of the stated interest payments.
D) the future value of the face amount plus the future value of the stated interest payments.

Question 11

Bonds can be secured or unsecured. Likewise, bonds can be term or serial bonds. Which is more common?

A) Secured and term.
B) Secured and serial.
C) Unsecured and term.
D) Unsecured and serial.

Question 12

A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of interest is also 10%. These bonds will sell at a price that is:

A) Equal to $500,000.
B) More than $500,000.
C) Less than $500,000.
D) The answer cannot be determined from the information provided.

Question 13

Megginson, Inc. issued a five-year corporate bond of $300,000 with a 5% interest rate for $330,000. What effect would the bond issuance have on Megginson, Inc.'s accounting equation?

A) Increase assets and liabilities.
B) Increase and decrease assets.
C) Increase assets and stockholders' equity.
D) Increase and decrease liabilities.

Question 14

Which of the following definitions describes a serial bond?

A) Matures on a single date.
B) Secured only by the "full faith and credit" of the issuing corporation.
C) Matures in installments.
D) Supported by specific assets pledged as collateral by the issuer.

Question 15

Convertible bonds:

A) provide potential benefits only to the issuer.
B) provide potential benefits only to the investor.
C) provide potential benefits to both the issuer and the investor.
D) provide no potential benefits.

Question 16

Term bonds are:

A) bonds issued above the face amount.
B) bonds that mature in installments.
C) bonds that mature all at once.
D) bonds issued below the face amount.

Question 17

Which of the following definitions describes a term bond?

A) Matures on a single date.
B) Secured only by the "full faith and credit" of the issuing corporation.
C) Matures in installments.
D) Supported by specific assets pledged as collateral by the issuer.

Question 18

Which of the following is not a true statement?

A) Companies that are believed to have high bankruptcy risk generally receive low credit ratings and must pay a higher interest rate for borrowing.
B) As a company's level of debt increases, the risk of bankruptcy increases.
C) Interest expense incurred when borrowing money, as well as dividends paid to stockholders, are both tax-deductible.
D) The mixture of liabilities and stockholders' equity a business uses is called its capital structure.

Question 19

A home loan with fixed monthly payments and the house as collateral most closely represents which of the following bond characteristics?

A) Secured and term.
B) Secured and serial.
C) Unsecured and term.
D) Unsecured and serial.

Question 20

The advantages of obtaining long-term funds by issuing bonds, rather than issuing additional common stock, include which of the following?

A) Interest payments are tax deductible to the company, while dividends are not.
B) The risk of going bankrupt decreases.
C) Expansion is achieved without surrendering ownership control.
D) a. and c.

Question 21

Bonds usually sell at their:

A) Maturity value.
B) Present value.
C) Face value.
D) Call Price.

Question 22

A $500,000 bond issue sold for $510,000. Therefore, the bonds:

A) Sold at a premium because the stated interest rate was higher than the market rate.
B) Sold for the $500,000 face amount plus $10,000 of accrued interest.
C) Sold at a discount because the stated interest rate was higher than the market rate.
D) Sold at a premium because the market interest rate was higher than the stated rate.

Question 23

Given the information below, which bond(s) will be issued at a discount? $$\begin{array} { | l | c | c | c | c | } \hline & \text { Bond 1 } & \underline { \text { Bond 2 } } & \underline { \text { Bond } \mathbf { 3 } } & \underline { \text { Bond 4 } } \\\hline \text { Stated Rate of Return } & 5 \% & 7 \% & 12 \% & 10 \% \\\hline \text { Market Rate of Return } & 7 \% & 8 \% & 12 \% & 9 \% \\\hline\end{array}$$

A) Bond 1
B) Bond 2
C) Bond 4
D) Bonds 1 and 2

Question 24

Given the information below, which bond(s) will be issued at a premium? $$\begin{array} { | l | c | c | c | c | } \hline & \underline { \text { Bond 1 } } & \underline { \text { Bond 2 } } & \underline { \text { Bond 3 } } & \underline { \text { Bond 4 } } \\\hline \text { Stated Rate of Return } & 7 \% & 12 \% & 10 \% & 8 \% \\\hline \text { Market Rate of Return } & 8 \% & 10 \% & 10 \% & 9 \% \\\hline\end{array}$$

A) Bond 1
B) Bond 2
C) Bond 3
D) Bonds 2 and 4

Question 25

The rate of interest expense incurred on a bond payable for bonds of similar risk is called the:

A) Face rate.
B) Yield rate.
C) Market rate.
D) Stated rate.

Question 26

Raiders Company issues a bond with a stated interest rate of 10%, face value of $50,000, and due in 5 years. Interest payments are made semi-annually. The market rate for this type of bond is 12%. What is the issue price of the bond?

A) $83,920
B) $46,320
C) $53,605
D) $50,000

Question 27

For a bond issue that sells for less than the bond face amount, the stated interest rate is:

A) The actual yield rate.
B) The prime rate.
C) More than the market rate.
D) Less than the market rate.

Question 28

Given the information below, which bond(s) will be issued at a discount? $$\begin{array} { | l | c | c | c | c | } \hline & \text { Bond 1 } & \text { Bond 2 } & \text { Bond 3 } & \text { Bond 4 } \\\hline \text { Stated Rate of Return } & 10 \% & 8 \% & 12 \% & 12 \% \\\hline \text { Market Rate of Return } & 12 \% & 8 \% & 15 \% & 10 \% \\\hline\end{array}$$

A) Bond 1
B) Bond 3
C) Bond 2 and 4
D) Bonds 1 and 3

Question 29

Raiders Company issues a bond with a stated interest rate of 10%, face value of $50,000, and due in 5 years. Interest payments are made semi-annually. The market rate for this type of bond is 8%. What is the issue price of the bond?

A) $83,920
B) $46,320
C) $54,055
D) $50,000

Question 30

Ordinarily, the proceeds from the sale of a bond issue will be equal to:

A) The face amount of the bond.
B) The total of the face amount plus all interest payments.
C) The present value of the face amount plus the present value of the stream of interest payments.
D) The face amount of the bond plus the present value of the stream of interest payments.

Question 31

The cash interest payment each period is calculated as the:

A) Face amount times the stated interest rate.
B) Face amount times the market interest rate.
C) Carrying value times the market interest rate.
D) Carrying value times the stated interest rate.

Question 32

A $500,000 bond issue sold for $490,000. Therefore, the bonds:

A) Sold at a discount because the stated interest rate was higher than the market rate.
B) Sold for the $500,000 face amount less $10,000 of accrued interest.
C) Sold at a premium because the stated interest rate was higher than the market rate.
D) Sold at a discount because the market interest rate was higher than the stated rate.

Question 33

Given the information below, which bond(s) will be issued at a premium? $$\begin{array} { | l | c | c | c | c | } \hline & \underline { \text { Bond 1 } } & \underline { \text { Bond 2 } } & \underline { \text { Bond 3 } } & \underline { \text { Bond 4 } } \\\hline \text { Stated Rate of Return } & 5 \% & 10 \% & 7 \% & 10 \% \\\hline \text { Market Rate of Return } & 7 \% & 8 \% & 7 \% & 9 \% \\\hline\end{array}$$

A) Bond 1
B) Bond 2
C) Bond 3
D) Bonds 2 and 4

Question 34

The rate quoted in the bond contract used to calculate the cash payments for interest is called the:

A) Face rate.
B) Yield rate.
C) Market rate.
D) Stated rate.

Question 35

Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 7% interest. The current market rate of interest is 7%. Which of the following is correct?

A) Both bonds will sell for the same amount.
B) Bond X will sell for more than Bond Y.
C) Bond Y will sell for more than Bond X.
D) Both bonds will sell at a premium.

Question 36

Which of the following is true for bonds issued at a discount?

A) The stated interest rate is greater than the market interest rate.
B) The market interest rate is greater than the stated interest rate.
C) The stated interest rate and the market interest rate are equal.
D) The stated interest rate and the market interest rate are unrelated.

Question 37

Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following is correct?

A) Both bonds will sell for the same amount.
B) Bond X will sell for more than Bond Y.
C) Bond Y will sell for more than Bond X.
D) Both bonds will sell at a discount.

Question 38

For a bond issue that sells for more than the bond face amount, the stated interest rate is:

A) The actual yield rate.
B) The prime rate.
C) More than the market rate.
D) Less than the market rate.

Question 39

Which of the following is true for bonds issued at a premium?

A) The stated interest rate is less than the market interest rate.
B) The market interest rate is less than the stated interest rate.
C) The stated interest rate and the market interest rate are equal.
D) The stated interest rate and the market interest rate are unrelated.

Question 40

Interest expense on bonds payable is calculated as the:

A) Face amount times the stated interest rate.
B) Face amount times the market interest rate.
C) Carrying value times the market interest rate.
D) Carrying value times the stated interest rate.

Question 41

When bonds are issued at a discount and the effective interest method is used for amortization, at each interest payment date, the interest expense:

A) Increases.
B) Decreases.
C) Remains the same.
D) Is equal to the change in book value.

Question 42

What is the stated annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)

A) 3%.
B) 4%.
C) 6%.
D) 8%.

Question 43

A bond issued at a premium indicates that at the date of issue:

A) Its stated rate was lower than the prevailing market rate of interest on similar bonds.
B) Its stated rate was higher than the prevailing market rate of interest on similar bonds.
C) The bonds were issued at a price greater than their face value.
D) The bonds must be non-interest bearing.

Question 44

What is the interest expense on the bonds in 2012?

A) $693,103.
B) $600,000.
C) $345,639.
D) $347,464.

Question 45

For the issuer of 20-year bonds, the carrying value using the effective interest method would decrease each year if the bonds were sold at a: $$\begin{array}{l}\text { }\\\begin{array} { c c c } &\text { Discount } & \text { Premium } \\\hline a.&\text { No } & \text { No } \\b.&\text { No } & \text { Yes } \\c.&\text { Yes } & \text { Yes } \\d.&\text { Yes } & \text { No }\end{array}\end{array}$$

A) Option a
B) Option b
C) Option c
D) Option d

Question 46

When bonds are issued at a discount and the effective interest method is used for amortization, at each subsequent interest payment date, the cash paid is:

A) Less than the interest expense.
B) Equal to the interest expense.
C) Greater than the interest expense.
D) More than if the bonds had been sold at a premium.

Question 47

The THA bonds have a life of:

A) 2 years.
B) 3 years.
C) 6 years.
D) Cannot be determined from the given information.

Question 48

A bond issued at a discount indicates that at the date of issue:

A) Its stated rate was lower than the prevailing market rate of interest on similar bonds.
B) Its stated rate was higher than the prevailing market rate of interest on similar bonds.
C) The bonds were issued at a price greater than their face value.
D) The bonds must be non-interest bearing.

Question 49

What is the market annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)

A) 3%.
B) 4%.
C) 6%.
D) 8%.

Question 50

When bonds are issued at a premium and the effective interest method is used for amortization, at each interest payment date, the interest expense:

A) Increases.
B) Decreases.
C) Remains the same.
D) Is equal to the change in book value.

Question 51

THA issued the bonds for:

A) $200,000.
B) $194,758.
C) $242,000.
D) Cannot be determined from the given information.

Question 52

When bonds are issued at a discount, what happens to the carrying value and interest expense over the life of the bonds?

A) Carrying value and interest expense increase.
B) Carrying value and interest expense decrease.
C) Carrying value decreases and interest expense increases.
D) Carrying value increases and interest expense decreases.

Question 53

An amortization schedule for a bond issued at a premium:

A) Has a carrying value that increases over time.
B) Is contained in the balance sheet.
C) Is a schedule that reflects the changes in bonds payable over its term to maturity.
D) All of the other answers are correct.

Question 54

When bonds are issued at a premium and the effective interest method is used for amortization, at each subsequent interest payment date, the cash paid is:

A) Less than the interest expense.
B) Equal to the interest expense.
C) Greater than the interest expense.
D) More than if the bonds had been sold at a discount.

Question 55

How would the carrying value of bonds payable change over time for bonds issued at a $$\begin{array} { l c c } & \underline { \text { Discount } } & \underline { \text { Premium } } \\\text { a. } & \text { No effect } & \text { No effect } \\\text { b. } & \text { No effect } & \text { Increase } \\\text { c. } & \text { Increase } & \text { Decrease } \\\text { d. } & \text { Decrease } & \text { Increase }\end{array}$$

A) Option a
B) Option b
C) Option c
D) Option d

Question 56

An amortization schedule for a bond issued at a discount:

A) Has a carrying value that decreases over time.
B) Is contained in the balance sheet.
C) Is a schedule that reflects the changes in bonds payable over its term to maturity.
D) All of the other answers are correct.

Question 57

THA issued the bonds:

A) At par.
B) At a premium.
C) At a discount.
D) Cannot be determined from the given information.

Question 58

Bonds payable should be reported as a long-term liability in the balance sheet at:

A) Face Value.
B) Current bond market price.
C) Carrying value.
D) Face value less accrued interest since the last interest payment date.

Question 59

What is the carrying value of the bonds as of December 31, 2013?

A) $8,834,770.
B) $8,686,606.
C) $8,734,070.
D) $8,783,433.

Question 60

When bonds are issued at a premium, what happens to the carrying value and interest expense over the life of the bonds?

A) Carrying value and interest expense increase.
B) Carrying value and interest expense decrease.
C) Carrying value decreases and interest expense increases.
D) Carrying value increases and interest expense decreases.

Question 61

Which of the following statements is correct?

A) Bonds are always issued at their face value.
B) Bonds issued at more than their face value are said to be issued at a discount.
C) Bondholders must hold their bonds until maturity to receive cash for their investment.
D) None of the other answers are correct

Question 62

The Viper retires a $40 million bond issue when the carrying value of the bonds is $42 million, but the market value of the bonds is $36 million. The entry to record the retirement will include:

A) A credit of $6 million to a gain account.
B) A debit of $6 million to a loss account.
C) No gain or loss on retirement.
D) A debit to cash for $42 million.

Question 63

When bonds are retired before their maturity date:

A) GAAP has been violated.
B) The issuing company will always report a non-operating gain.
C) The issuing company will always report a non-operating loss.
D) The issuing company will report a non-operating gain or loss.

Question 64

Which of the following leases is just like a rental?

A) An operating lease.
B) A capital lease.
C) Both an operating and a capital lease.
D) Neither an operating lease nor a capital lease.

Question 65

What is the annual stated interest rate on the bonds?

A) 3%.
B) 3.5%.
C) 6%.
D) 7%.

Question 66

What is the annual market interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)

A) 4%.
B) 3.5%.
C) 7%.
D) 8%.

Question 67

What is the annual stated interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)

A) 3%.
B) 3.5%.
C) 6%.
D) 7%.

Question 68

Which of the following is not a reason why some companies lease rather than buy?

A) Leasing may allow you to borrow with little or no down payment.
B) Leasing can improve the balance sheet by reducing long-term debt.
C) Leasing can lower income taxes.
D) Leasing transfers the title to the lessee at the beginning of the lease.

Question 69

X2 issued the bonds:

A) At par.
B) At a premium.
C) At a discount.
D) Cannot be determined from the given information.

Question 70

Financial leverage is best measured by which of the following ratios?

A) The debt to equity ratio.
B) The return on equity ratio.
C) The times interest earned ratio.
D) The return on assets ratio.

Question 71

The entry to record a monthly payment on an installment note such as a car loan:

A) Increases expense, decreases liabilities, and decreases assets.
B) Increases expense, increases liabilities, and increases assets.
C) Increases expense, decreases liabilities, and increases assets.
D) Increases expense, increases liabilities, and decreases assets.

Question 72

How does the amortization schedule for an installment note such as a car loan differ from an amortization schedule for bonds?

A) The final carrying value is zero in an amortization schedule for an installment note.
B) The final carrying value is zero in an amortization schedule for bonds.
C) The final carrying value is zero in both amortization schedules.
D) The final carrying value is not zero in either amortization schedule.

Question 73

In each succeeding payment on an installment note:

A) The amount of interest expense increases.
B) The amount of interest expense decreases.
C) The amount of interest expense is unchanged.
D) The amounts paid for both interest and principal increase proportionately.

Question 74

X2 issued the bonds for:

A) $100,000.
B) $107,000.
C) $104,212.
D) Cannot be determined from the given information.

Question 75

What is the annual market interest rate on the bonds?

A) 3%.
B) 3.5%.
C) 6%.
D) 7%.

Question 76

The Titan retires a $20 million bond issue when the carrying value of the bonds is $18 million, but the market value of the bonds is $23 million. The entry to record the retirement will include:

A) A debit of $5 million to a loss account.
B) A credit of $5 million to a gain account.
C) No gain or loss on retirement.
D) A debit to cash for $18 million.

Question 77

The X2 bonds have a life of:

A) 3 years.
B) 4 years.
C) 5 years.
D) Cannot be determined from the given information.

Question 78

Which of the following leases is essentially the purchase of an asset with debt financing?

A) an operating lease.
B) a capital lease.
C) both an operating and a capital lease.
D) neither an operating lease nor a capital lease.

Question 79

X2 buys back the bonds for $103,000 immediately after the interest payment on 12/31/12 and retires them. What gain or loss, if any, would X2 record on this date?

A) No gain or loss.
B) $3,000 gain.
C) $1,202 loss.
D) $327 loss.

Question 80

THA buys back the bonds for $196,000 immediately after the interest payment on 12/31/12 and retires them. What gain or loss, if any, would THA record on this date?

A) No gain or loss.
B) $370 gain.
C) $4,000 gain.
D) $1,242 loss.